Where Larry Summers Went Wrong

If I were Lawrence Summers, I’d feel free to start planning my winter vacation for 2014, and my summer one as well. With today’s stinging lead editorial in the Times calling on President Obama to pick Janet Yellen as the next chair of the Federal Reserve, the chances of Big Larry heading down to Foggy Bottom next February, after Ben Bernanke retires, are fast diminishing.

Just a week after Wonkblog’s Ezra Klein reported that Summers had emerged as the favorite for the Fed job, three key elements in the Obama coalition—progressive Democrats in the Senate, the women’s movement, and the liberal media—have lined up squarely against Summers and in favor of Yellen, who would be the first woman to head the Fed. As the objections to Summers have multiplied, the White House has appeared to backtrack. Late last week, it put out word that no decision had been made on the Fed nomination, and that there wouldn’t be one until the fall, which probably means mid-September. Of course, Obama may still defy the liberals and progressives to appoint Summers, who served as his top economic adviser during his first two years in office, but I wouldn’t even bet Monopoly money on it.

As evidenced by his appointment of Susan Rice as Ambassador to the United Nations, and his more recent decision to appoint Caroline Kennedy as Ambassador to Japan, Obama is loyal to his aides and supporters—at least the ones he knows personally. By all accounts, he likes Summers and admires his intellect, and his top two economic aides—Gene Sperling and Jason Furman—do as well. But the President is also a realist, and the political calculus is now firmly against the former Treasury Secretary.

Put yourself in Obama’s shoes and ask yourself what benefits you would gain from appointing Summers. The costs are pretty clear. You would alienate a significant portion of the Democratic Party and risk instigating a damaging internal debate that could well drag on into next year, when the new Fed appointee will take over from Bernanke. And what are the pluses?

From a monetary-policy perspective, what the White House wants, above all, is a Fed chair who is committed to growing the economy and bringing down unemployment. Both Yellen and Summers are in the “dove” camp, focussing on fixing unemployment before worrying about inflation, but Yellen is probably more firmly committed to expansionary policies. Earlier this year, she suggested that the Fed might want to keep the federal funds rate close to zero even after the unemployment rate falls below 6.5 per cent, which the central bank has identified as a key threshold. As I pointed out in a post back in April, Yellen would arguably be the most dovish head of the Fed since Marriner Eccles, whom F.D.R. appointed during the Great Depression.

Summers, in his recent commentary, has also written about the perils of high unemployment and the need for expansionary policies. But he has also raised some legitimate questions about the efficacy of quantitative easing—the Fed’s tactic of spending tens of billions of dollars every month to buy long-term bonds in an effort to reduce long-term interest rates. Nominating Summers could create an expectation that the Fed would wind down quantitative easing more rapidly than the market currently thinks, which could conceivably lead to a spike in long-term rates. At the very least, Summers would need to deal with the perception that his appointment could lead to a change in policy.

According to Ezra Klein’s original post, the President and his aides are also concerned about the possibility of another economic crisis, and they want somebody at the Fed who would respond quickly and capably. That’s an understandable concern. But here, too, there isn’t necessarily much to separate Summers and Yellen. In 2008, both of them recognized that the financial crisis, if unaddressed, could lead to another depression, and they both supported an aggressive fiscal and monetary response.

Going back to before the financial crisis, Yellen actually gets the nod for having expressed concerns about the possible consequences of the housing and credit bubble. In December of 2007, she said that “the possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real.” (She didn’t get everything right. She also said, “I don’t foresee conditions in the banking sector getting as bleak as during the credit crunch of the early nineteen-nineties.”)

Which brings us to what is still the heart of the matter: Summers’s beliefs, statements, and policy recommendations in the period before the financial crisis and going back to the nineteen-nineties, when he was at Treasury. This is not the place to rehash his support for financial deregulation, his dismissal of officials and commentators who expressed concerns about the direction his policies, or his public support for Alan Greenspan, a Fed chairman who, in his bones, barely believed in regulation at all. Many people, myself included, have written about these things at length, critiquing the Panglossian theories on which Summers and others based their policy advice.

My point here is strictly a political one: if you were Summers, and you wanted to become the next Fed chairman—which he most assuredly does—wouldn’t you have tried to inoculate yourself against the charge that, in the words of Sheila Bair, the former head of the Federal Deposit Insurance Corporation, you were “part of the deregulatory cabal that got us into the 2008 financial crisis”? Of course you would, and, presumably, so did Larry. But rather than doing it directly, by talking about deregulation and acknowledging the intellectual errors that he and others made, he has chosen to rely on his record in the Obama Administration and his renewed interest in subjects such as unemployment and inequality.

If the past week has shown anything, it is that this strategy of atonement rather than acknowledgment has proved insufficient. When all too many people think of Summers, they still remember him frustrating efforts by Brooksley Born, the former head of the Commodity Futures Trading Commission, to regulate derivatives during the late nineties, or his statement to a Fed conference in 2005 about the rapid growth of securitization on Wall Street, and the development of complex products such as credit-default obligations, when he said, “It seems to me that the overwhelming preponderance of what has taken place is positive.”

Clearly, there was no way for Summers to erase such things from the record. But surely he could have tried to nest them in a narrative about acknowledging past errors, seeking enlightenment, and moving on to new challenges. At some point in the past few years, he should have offered a mea culpa, as he did at Harvard, in 2005, when he issued a public apology for his controversial remarks about women and science. (“I was wrong to have spoken in a way that has resulted in an unintended signal of discouragement to talented girls and women,” he said.)

Given the scale of the disaster that financial deregulation eventually begat, another bit of public grovelling was sorely needed—or, at the very least, a public acknowledgement of the charges against him and a reasoned reconsideration and defense of the positions he had taken. After all, even Greenspan eventually acknowledged making some errors. Testifying to Congress in October, 2008, the Maestro said, “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders, and their equity in the firms…”

Summers, as far as I am aware, has never publicly acknowledged his intellectual and policy errors. Perhaps he doesn’t think he made any—but I doubt that. In private, he can be self-critical and even poke fun at himself. Perhaps, based on his experience at Harvard, he doesn’t think mea culpas work. Despite his 2005 apology, he ended up being forced to resign as the university’s president in 2006 following a vote of no confidence from the Faculty of Arts and Sciences. If that’s what’s behind Summers reluctance to engage publicly about the lessons of deregulation, he has misinterpreted history. Although the Harvard apology wasn’t sufficient to save his job, it did enable him to return to public life after Obama was elected.

Let me be clear: I’m not saying that if Summers had adopted a similar stance about his record on deregulation he’d be the next Fed chairman. Given his actions in, for instance, opposing the Volcker Rule as recently as 2009, some influential Democrats on Capitol Hill, and many media commentators, wouldn’t have supported his appointment to replace Bernanke in any circumstances. Also, regardless of what Summers said or did, the White House politicos, such as Valerie Jarrett and Dan Pfeiffer, might well have found irresistible the prospect of appointing a well-qualified woman to run the Fed. But if Summers had publicly acknowledged his fallibility on policy issues as well as gender issues, he’d be in a better spot than he is now, and his public defenders wouldn’t be so few and far between.

If he were a more astute politician, he’d have ’fessed up. Of course, if he were a more astute politician, he wouldn’t be Larry Summers.

Photograph by Mark Wilson/Getty.

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